New Rules for GST Credit utilisation

New GST Credit utilisation rules

Recently government has came out with the changes in the GST Credit utilisation method, which will result in to accumulation of credit on one hand cash payment of GST liability on the other hand. This will ultimately result in to working capital crunch to affected companies. As per new rules priority are changed for setting off the credit against liability.

New rules for GST Credit utilisation

On a reading of the below amendments, the order of set-off of Input Tax Credit will now start with Integrated Tax credit is first to be settled against Central Tax credit or the State Tax credit, or Union Territory Tax credit, as the case may be. Unless and until Integrated Tax credit has been completely utilized, one cannot use the CGST/ SGST credits available.

Firstly, to take into consideration the new sections inserted after section 49 of the CGST Act-

“49A. Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilised towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilised fully towards such payment.

49B. Notwithstanding anything contained in this Chapter and subject to the provisions of clause (e) and clause (f) of sub-section (5) of section 49, the Government may, on the recommendations of the Council, prescribe the order and manner of utilisation of the input tax credit on account of integrated tax, central tax, State tax or Union territory tax, as the case may be, towards payment of any such tax.”.

Understanding new GST Credit utilisation rules with Illustration:

First, lets  have a look at Present method of GST Credit utilisation mechanism which is explained as below with illustration:

GST Credit utilisation rules
GST Credit utilisation rules

In the above example it can be seen that all the GST credit can be seamlessly adjusted GST liability, which in the current example results in to NIL GST liability. Now lets have a look at what has changed after introduction of new GST credit utilisation rules.

New GST Credit utilisation rules
New GST Credit utilisation rules

From the above example, it is to be noted that although we have total GST liability of 35,00,000 and also credit available is Rs. 35,00,000, still SGST liability is to be served by paying in cash and on the other hand CGST credit will remain unutilised.

Impact on Business

From the above example it is clear that new GST Credit utilisation rules will result in to unnecessary GST outgo, this will ultimately result in to higher working capital requirement. GST was introduced to eliminate cascading effect of taxes, but with this rules similar kind of cascading effect will arise where in one hand we have tax credit still we have to pay GST in cash on other hand.

Which type of business will get affacted? – From analysis it can b understood that business in which there is more IGST credit availed from interstate purchase/ import of goods or services and selling their products in local markets will face problems. To mitigate this one need to analyze and change the ordering strategy.

Author: smit shah

I am a passionate Chartered Accountant having deep interest in taxation with combination of blogging.

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